ABB's 'blue jeans' strategy in solar

ABB $1 billion purchase of inverter maker Power-One signals its desire to cash in on the boom in solar-panel installations – without investing in solar panels themselves.

Over the weekend, ABB (NYSE: ABB) announced the $1 billion acquisition of Power-One (NASDAQ: PWER), which makes a wide spectrum of power conversion electronics equipment.

Notably, Power-One is a major player in the market for inverters, which convert DC power into AC power.  In turn, inverters are important for synchronizing DC-based technologies such as batteries, fuel cells and photovoltaics (PV) with the AC electricity grid.

While there may be other reasons underlying the acquisition, ABB singled out Power-One’s inverter lines for the PV market.  At first blush, this might seem surprising, because as most observers of the cleantech sector know too well, the PV sector has been brutalized in recent years.

Surely, the PV industry has been beset by intense competition among module suppliers, stemming from global excess manufacturing capacity that has accumulated over the past few years.  This is bad news for module manufacturers, who have struggled to attain or maintain profitability.  However, it’s very good news for customers, as PV system prices have plummeted in recent years.  In turn, this has dramatically expanded the market for which PV installations are now economically competitive to grid-based power, and PV market growth rates are on a hockey-stick upward trend.

Accordingly, the demand for ancillary equipment required for grid-connected PV systems — most prominently, inverters — has also grown dramatically.  As a result, the inverter manufacturers such as Power-One have been able to take advantage of the rising tide.  ABB clearly wants to jump on it.

So, ABB is playing the Levi Strauss strategy: in the 1850′s, Strauss decided he wanted to participate in the California gold rush boom — but rather than becoming a miner himself, he decided to supply the miners with their required supplies.  In 1873, Strauss invented blue-jeans for the miners to wear as they flocked to the hills and — lo — Levi’s was born.  Thereafter, Levi Strauss made the fortune that the miners were actually seeking themselves, and for the most part never attained.

ABB thus seems to see that it can make good money from the booming PV market without buying into the challenge of being a supplier of PV modules.  It’s strong validation of the long-term fundamental appeal of PV as a major force in the energy sector for decades to come.